Star Income Stocks have been classified by Lincoln as our preferred income stocks for consideration, suitable for investors looking for income as a priority from their investments who also want the comfort that they are investing in quality businesses.
These stocks are analysed by our Research team and need to meet the following criteria:
- Strong or satisfactory financial health
- A strong and sustainable dividend yield.
To determine whether a dividend yield is sustainable, a potential income stock is assessed based on a combination of factors which include the attractiveness of the dividend yield relative to the market, amount of cash and free cashflow, trend in the dividend payout ratio, earnings stability and growth, and forward dividend expectations.
New Star Income Stocks may be added to the list after each interim and annual reporting period provided they satisfy Lincoln’s benchmark criteria for Golden Rules 1, 2 and 3, which are outlined in more detail below. These criteria are aimed at identifying companies that are currently financially healthy, have a track record of defensive dividend payments and are expected to pay an above market yield moving forward that is sustainable.
Golden Rule 1: Financial Health
This is the first and most important golden rule. Lincoln's unique Financial Health model assesses key accounting ratios relating to each company's profitability, cashflow, liabilities and assets. It then determines a Financial Health rating commensurate with the business risk of the company. To meet this criterion a stock must exhibit Strong or Satisfactory Financial Health ratings. A company must be healthy for at least two consecutive periods or more. It is not sufficient for a stock to be healthy for solely one period.
Golden Rule 2: Past Financial Performance
Lincoln uses Dividend per share (DPS), Grossed up Dividend Yield, Dividend payout ratio, Earnings per share (EPS), Fee cashflow per share to assess a stock, and its ability to pay above market dividend yields in the recent past.
The purple star status in the Star Income Criteria denotes that it has met Golden Rule 2 from an income perspective.
Golden Rule 3: Outlook
At Lincoln we want to gauge whether a company's earnings are sustainable, enabling it to continue to pay above market dividend yields into the future and therefore remain as a Star Income Stock in the upcoming financial periods. At Lincoln, our analysts do not model forecasts earnings, rather, we look at identifying the active risks that could materially change the growth expectations of a company relative to their consensus forecasts.
A company can be removed as a Star Income Stock by our Analysts at any time if it is felt the company is not likely to continue to pay an above market yield in the future. This could be due to a negative announcement that will affect the company's ability to continue to meet Lincoln’s benchmark criteria in the future, or a sustained run in share price that has effectively reduced the current yield significantly. A company may also lose its Star Income Stock status at the time that their annual or interim financial results are analysed.
We will always validate our decision within the Analyst Commentary which can be accessed via the 9 Golden Rules screen or the Analyst Comments icon.
It is important to note that Star Income Stocks may include companies that are either current Star Growth Stocks or Borderline Star Growth Stocks, however this is not a requirement for a company to be considered a Star Income Stock.
If you would like to discuss a company’s Star Income Stock status, members can contact our Research team via email at firstname.lastname@example.org or speak to the team directly on 1300 676 333.